Friday, March 23, 2012
Specialist in Labor Economics
Approaching three years into the recovery from the 2007-2009 recession, the unemployment rate remains over 8%. The persistent difficulty of many of the workers who lost jobs to find reemployment has meant reduced incomes for them and their families. A historically slow rebound in the labor market appears to be partly responsible for some groups’ focus on the distribution of the benefits of economic growth and for some policymakers’ interest in redistributing income through the tax code, for example. Varying perceptions about a trade-off between economic growth and income equality appear to underlie longstanding congressional deliberations about such policy issues as the progressivity of income tax rates, the tax treatment of capital gains, and the adjustment of the federal minimum wage.
If income were equally divided across households, each quintile (fifth) would account for 20% of total income. The Congressional Budget Office and others have documented that the bottom fifth has long accounted for much less than 20% of total income. The bottom quintile’s share of income has remained little changed for the past few decades at less than 4%, according to U.S. Census Bureau data. In contrast, the income shares of the top fifth and the top 5% of households appear to have trended upward. The top fifth’s share of total household income rose from 42.6% in 1968 to 50.2% in 2010; the top 5%’s share, from 16.3% to 21.3%. (Estimates derived from federal income tax data suggest that those at the very top of the income distribution have experienced greater gains.) The middle class, defined as the middle 60%, received a disproportionately smaller share of the total economic pie in 2010 (46.5%) than in 1968 (53.2%).
Two explanations are most often offered for the changes in recent decades in the U.S. distribution of income. They are skill-biased technological change (SBTC) and globalization. Additional support for education and training is a frequently cited policy measure to both improve U.S. competitiveness in the international marketplace and raise the relative incomes of low- and middle-skill workers as well as the incomes of their children when they enter the labor force.
Based on the limited data that are comparable across nations, the U.S. income distribution appears to be among the most uneven of all major industrialized countries and the United States appears to be among the nations experiencing the greatest increases in measures of inequality. Three leading explanations are put forth for these cross-country differences: (1) other advanced economies devote a larger share of national output to transfers, which tends to equalize income across households; (2) the progressivity of tax rates varies by country and thus has different effects on the distribution of after-tax income; and (3) equality in the distribution of earnings, which account for most household income, varies substantially across countries.
The extent to which countries undertake policies that affect their income distributions may reflect national differences in perceptions about the degree of income mobility. In the United States, a longstanding argument against redistributionary measures has been that each person has an equal opportunity to move up the income ladder. Research raises questions about whether Americans’ reported perceptions about their likelihood of changing position in the income distribution are exaggerated.
Date of Report: March 7, 2012
Number of Pages: 21
Order Number: R42400
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